A judge this week halted a comprehensive effort to grant Tesla CEO Elon Musk a pay package now estimated at $100 billion.
On 101 pages opinionChancellor of the Delaware Court Kathleen McCormick refused to overturn the previous decision to terminate Musk’s salary. In essence, she wrote, the defense arguments representing Tesla and some of the board members were “creative” but missed the mark. McCormick previously overturned Musk’s pay in a previous ruling, and after losing the trial, Tesla held a new shareholder vote on pay in June 2024 in an attempt to pay Musk what Tesla’s board said he was rightfully owed. Tesla’s president, Robyn Denholm, told shareholders the board was behind the compensation package and rallied investors to re-approve Musk’s pay as a way to overturn the court’s decision, which shareholders overwhelmingly did in a vote that garnered 72% support in June 2024.
Tesla told investors that the vote, which it called a “common law ratification,” could extinguish claims that the board breached its fiduciary duty by awarding the pay plan. “When properly carried out, common law ratification ‘reaches back’ to validate the contested act from its initial enactment,” Tesla wrote shareholders.
The court decisively rejected such an approach.
“There are at least four fatal flaws,” McCormick wrote in her decision. “A large and talented group of defense companies has been creative with the ratification argument, but their unprecedented theories run counter to multiple types of established law.” (McCormick wrote in her decision that Tesla was a “law firm” on the day it filed its proxy statement in April asking shareholders to ratify Musk’s pay by adding five additional law firms to the list of attorneys representing defendants in the wage suit.)
ua publish on X, Tesla wrote that the court erred and plans to appeal the decision.
“This ruling, if not overturned, means that Delaware companies are being run by judges and plaintiffs’ lawyers, not by their rightful owners – the shareholders.”
So what exactly led McCormick to her decision? These are the “four fatal flaws”, which she described:
Fatal Flaw #1: Tesla had no procedural basis to reverse the court’s decision
Tesla first debuted the argument that the shareholder ratification vote was a “powerful elixir” that could cure the evil in its April proxy statement, McCormick wrote. But Tesla had no basis to reverse the outcome of the court’s decision based on the evidence it created after the trial, the opinion said. Tesla’s lawyers later backed away from that position during oral arguments in court, backing off from more aggressive language and instead asking for “modification of the remedy” without challenging the court’s findings. Still, McCormick wrote, the lawyers sought “a verdict for the defendants on all counts,” which would be tantamount to overturning the court’s decision in Tesla’s favor.
“Therefore, the ‘only relief’ sought by the defendants at the time of oral argument was a ‘modification of the remedy’ of annulment and reversal of the entire outcome of the case in favor of the defendants,” the judge wrote, punctuating her claim with a quip: “That’s all.”
Fatal Flaw #2: Timing. Ratification of customary law cannot be initiated after opinion after trial
Second, Tesla raised that defense of common law ratification after the opinion voiding his pay came after the trial — a full six years after the case was filed, a year and a half after the trial and five months after the court’s opinion, McCormick wrote. No court has ever allowed shareholder ratification after the facts have been settled, with a kickback exception over the past 70 years, McCormick wrote.
“Wherever the outer limit of delay without prejudice lies, the defendants have crossed it,” she wrote. “The court declines to exercise its discretion to permit defendants to raise the shareholder ratification defense at this late stage.”
Fatal mistake #3: Tesla’s approach did not adhere to the established legal framework
The third and potentially most significant flaw that McCormick pointed out was related to the legal framework that Tesla relied on. She wrote that a shareholder vote alone is not enough to ratify a “conflicting controller transaction,” which was how Musk’s support was described in McCormick’s previous opinion to cut his salary. “Transactions by conflicting controllers present multiple risks to minority shareholders,” she wrote. And in this particular case, there is what is called “tunneling risk,” where someone who controls the company can try to get ahead through related party transactions.
Because of the significant risk, the court applies a more stringent audit standard that requires specific steps to be taken such as an independent special audit committee and an informed shareholder vote, among other requirements. Tesla’s approach did not stick to the given framework.
“Defendants’ failure to adhere to the framework for securing shareholder ratification in the context of a controller conflict offers an independent basis for rejecting the ratification argument,” she concluded.
Fatal Mistake #4: Multiple Material Misstatements
Finally, an April proxy statement asking shareholders to ratify Musk’s pay after the court overturned it was “materially misleading,” McCormick wrote. She noted that “there are many ways in which the Proxy Statement distorts the truth,” but one glaring omission is that much of what Tesla told its shareholders in that proxy statement was inaccurate or simply wrong.
Each of the four fatal errors with the ratification argument was sufficient to defeat the petition for review of the decision, McCormick wrote.
“Taken together, they pack a powerful punch.”
Tesla did not immediately respond to a request for comment.
